Focusing on the Core

New players are shaking things up in the human resources management software world by challenging traditional “core HR” powerhouses with systems that some say add functionality and, in many cases, cost less.

The new technologies and an ever-widening selection of vendor offerings are providing more and more choices—and more confusion about what to choose. What should a company look for in a core HR system, the software that holds basic but important employee data?

“What has been traditionally known as ‘core HR’ is evolving quickly,” says Doug Dennerline, president of San Mateo, California-based SuccessFactors Inc., one of the talent management software vendors disrupting the market.

For much of the past decade, core HR products have represented a large but relatively sleepy corner of the HR applications market. Over the past few years, though, the core HR market has heated up. For one thing, firms have sought a stable “system of record” that can help them comply with rules such as training requirements and nondiscrimination laws. In addition, companies have put more attention on their human resources management systems as they seek to analyze their workforce data more rigorously for business insights.

One key distinction in the increasingly crowded market is how core HR tools are delivered. On the one hand, there are the traditional “on-premise” systems sold by vendors including software giants Oracle and SAP. With on-premise software, companies typically buy a permanent license to the product, install it on their own computers and pay an annual “maintenance” fee to vendors for software upgrades and patches to fix “bugs.”

Then there are newer core HR applications delivered as a service over the Internet by vendors including Lawson Software, SilkRoad Technology Inc., SuccessFactors Inc., Ultimate Software and Workday Inc. Under the software-as-a-service model—sometimes called the “on-demand” approach—organizations usually sign a contract to access the applications for a set amount of time, such as three years.

Some vendors straddle the fence. Oracle, for example, designed its new Fusion applications to be delivered both through the on-premise method and as a service over the Web. Lawson also will deliver core HR software either way.

“The SaaS model that Workday and Ultimate have is attractive because it really takes the upgrading and the patching out of play, and it makes the cost of ownership very simple and transparent,” he says.

A study by research firm Aberdeen Group last year found that companies were split on whether to purchase an on-premise system or an on-demand product and overwhelmingly chose whichever system would be most cost-effective. “It came down to cost,” said Aberdeen analyst Jayson Saba. “If it is too expensive for a company to replace its on-premise SAP, they aren’t going to dump it for an on-demand Ultimate Software system.”

Another 2010 Aberdeen study of more than 300 organizations found that, in the face of the economic downturn, companies were investing in core HR systems that help manage costs, ensure compliance and allow HR personnel to be more strategic. The companies surveyed believed that integrating human resources management systems with payroll and other applications had benefits including a lower cost of administering HR functions.

That finding plays to the strengths of the traditional big guns of core HR systems, Oracle and SAP. Both vendors have payroll systems. And they portray their core HR products as crucial hubs to a wide range of related HR software and other business management tools.

“Our customers tend to review Oracle’s products and say, ‘This is our system of record and not just for our HR processes,’ ” says Gretchen Alarcon, vice president of human capital management strategy at Oracle. “They are using that one system as a core centerpiece that everything else integrates with.”

Although software as a service has grown in popularity in recent years, it raises questions about long-term costs. SaaS providers defend the approach—which is sometimes referred to as “cloud” computing.

“Independent sources like McKinsey have confirmed that the pure cloud model gives customers the best value not only in terms of total cost of ownership over time, but also in terms of immediate value from a superfast implementation, no worries about infrastructure and maintenance, and continual product innovation,” says Tom Fisher, chief information officer of SuccessFactors.

For small to midsize companies, Hamerman agrees: “The long-term costs of ownership tend to favor SaaS, except where very large enterprises can achieve significant economies of scale via licensed, on-premise ownership for transactional HR and payroll processes.”

Vendors with newer products also claim they are bringing new capabilities to the table. Workday, for example, says its core HR system has been built from the ground up to be able to adapt to frequently changing corporate structures and newer management models, such as “matrixes” where employees report to multiple managers. The software also can run on the latest devices used by today’s employees, such as iPads.

“We had the opportunity to start from scratch,” says Leighanne Levensaler, Workday’s vice president of human capital management product strategy. “That gave Workday the chance to build a modern system that really meets the needs of today’s business climate.”

In addition, Workday has a payroll product that can be paired with its core HR application. Ultimate and Lawson also have payroll applications.

That’s not the case at SuccessFactors or SilkRoad, which started out as talent management software vendors. But these firms say their core HR products can tie up with other payroll applications or services. And they tout additional functionality, such as social networking tools that foster collaboration.

SuccessFactors, for example, says that its product allows users to easily update their own employee profiles with such information as their skills and experience, as well as tap the system to find and collaborate with colleagues across the organization.

SilkRoad’s software also allows for individual employees to enter their own information, reducing the need for the type of back-end work that is required by other systems, says company co-founder and chief operating officer Brian Platz.

Aberdeen’s Saba says the core HR field isn’t done changing. “There is a lot of activity on the provider side,” he says. “The market is moving and it is going to continue” to do so.